Tuesday, August 09, 2005

Early Retirement

Ironic, 'no (me writing on this topic)?

Early retirement must be farthest from the minds of those who have not been made part of the workplace. But I feel it is important to consider this option (once I get a job of course). It may also be important in considering which job to look for (with the right set of credentials). You don't want to slave away for 5 years knowing that your salary won't be able to provide adequately for a family, and then save some for retirement.

With Social Security amounting to nothing in the Philippines, and rising health costs, a sizable nest egg should be obtained in the medium term. Not every one realizes this, and as a result we see OFWs return to the hand-to-mouth existence they temporarily escaped during times of plenty; doctors still working the clinics long after retirement age; and old people who die ungracefully with no medical care whatsoever.

And I really love Reason number 7. "Work interferes with what I really want to do with my life."

Most of the information on the Internet is from a US perspective, where the people have more saving options, more money to be received from Social Security, and old people sent to nursing homes when they are old enough. Our perspective here is to have more and more children so that they will be the ones taking care of us when we are old. Such a perspective is admirable because it reflects the Filipino value of keeping strong family ties, but it is ultimately disastrous to our economy as the unabated population growth continues. Unemployment rate 2003 = 11%. But I digress.

If you are aiming to live in the Philippines and support a family of 6, based on NEDA data you need PHP5111 a month. But that's bare minimum, 2003 levels. Factoring in 8% inflation, you need PHP 5967 minimum monthly today. I think you need an average of PHP 12500 monthly to maintain a comfortable lifestyle if you are single or only plan to support your wife; if there are other dependents then you need to keep on working instead. Or enter politics (Heaven forbid).

Interest rates are on average, approximately 8%/annum. Any investment below this (pre-tax) is not effective. But in order to get this rate (which is from government securities etc.) you might have to put in at least PHP 50000 in government bonds ... or get into mutual funds for much lower (PHP 5000 for Philam Asset Management).

So if we compute for the nest egg that we need to ensure that we will have that PHP 12500 monthly, at a withdrawal rate of 5% (the amount you get from the nest egg per annum), you need to have saved today PHP 3,000,000.

Factor in inflation at 8% and you will need, in 20 years' time, PHP 12,950,000 to get the equivalent of PHP 12500 in real buying terms (about PHP 54000).

So how do we get to our magic number? Three simple (but hard to follow) ways are found here with my notes below.

1. Save more!

If you are still able to squeeze some more savings out of that pittance of a salary, do so now. And then invest your money somewhere. If you cannot squeeze anything out of that salary, get a better paying job! Do some projections on the investment and return you will get when you switch careers or go abroad as an OFW. You will be surprised... and doing the math will make you realize that you have to save on that computed income, not put up a white elephant with your OFW earnings.

Forget about company pensions, which are practically non-existent in the Philippines. Also, SSS and GSIS are government controlled cash cows and I wouldn't expect too much from them. Don't factor in their pensions when making your computations; by the time you do retire, God knows how much of a pension they are able to pay out.

2. Downsize

Not an option. Unless you plan to move to a smaller house in an area with less expensive property values... but it's a seller's market out there, a glut of floor space in Manila and no takers in the provinces.

3. Cut your living expenses

If it means moving to the countryside where the standard of living is much less expensive, then go ahead! Better to decongest Imperial Manila (oops!). If, however, you can't live without your weekly mocha frappucino, then you might stop reading and go to the lifestyle pages now.

I'm not saying that you should live like John Rambo or the NPA. A modest lifestyle with all basic amenities, an occasional trip to the regional SM/biggest mall, a prepaid cellphone and cable TV - that should be more than enough. Oh, and don't forget food and medical care too. Forget PhilHealth, the old doctors who populate the hospitals (and haven't taken up Nursing yet because they are making a killing with their tactics) will charge you a professional fee on top of the PhilHealth benefit. If you are so hardheaded and not consider this, be prepared to write a promissory note to pay the professional fee within one year.

"Finally, do be realistic. Remember that retiring ten years early means ten years is knocked off your pensionable service and investment returns, while ten years is added to the length of your retirement. Sadly, for most workers, this 'double whammy' would be too much to bear."

I'm not saying you have to earn PHP 12,950,000 right now. That's why I said in 20 years you need to have that much money to retire with the same buying power as today's PHP 12500/month.

Investors can safely withdraw 4% from a properly diversified portfolio. That is, again, using US assumptions like return on investment and projected life expectancies. That means your investment, after inflation and taxes, must earn this 4% to be intact for the next year, or your nest egg doesn't run out before you die. Morbid as it sounds, but yes you can't bring all that money to the grave.

I hope I have educated you on this subject, and there are loads more out there that are better qualified than I am to give this kind of information. Thanks for reading anyway.

PS Beware of Hocomania!!! (no, not wrestling!)

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